The UK's Financial Services Authority has called for the substantial strengthening of the Financial Services Compensation Scheme, which guarantees savings up to GBP50,000 in the event of a deposit taker collapsing. Although this is good news for depositors, the cost to financial institutions will be steep, which will hit them hard, particularly at a time when IT expenditure has been severely cut.
The FSA has published a consultation paper calling for the substantial strengthening of the Financial Services Compensation Scheme (FSCS), which currently guarantees savings up to a maximum of GBP50,000 in the event of a deposit taker (bank, building society or credit union) collapsing. In recent months the FSCS has secured the deposits of retail savers in Bradford & Bingley, Kaupthing Singer & Friedlander, Landsbanki (Icesave) and London Scottish Bank. These emergency actions were performed under existing legislation. However, Datamonitor believes that the financial crisis vividly exposed major shortcomings in the ad hoc reporting capabilities of all of the UK's financial institutions, making remedial action paramount. The intervention of the regulator is required in order to compel banks to change their ways.
The Tripartite Authorities, namely the FSA, HM Treasury and the Bank of England, also appear to share this view. They are united in their belief that significant improvements should be made to the FSCS, which suggests that they are anticipating further failures within the UK market. Assuming the authorities succeed in implementing the fast payout plans laid out in the consultation paper, the FSCS will have the ability to provide depositors with access to at least a proportion (as yet unspecified) of their savings within seven calendar days from the date of failure/default of the institution in question.
Unsurprisingly, this has far-reaching technological and financial implications. Under the new plans, institutions will be required to produce a list of all customers' deposits within 48 hours of a failure/default occurring. In other words, banks and building societies, as well as credit unions to a lesser degree, will finally be forced to develop their existing IT infrastructure to a point where a single view of a customer's deposits can be rapidly provided via ad hoc reporting outside of scheduled batch processing runs. This will also necessitate the deep-cleansing of existing data to ensure accuracy and consistency, the adding of flags to eligible accounts, the creation of a limit check facility to automatically identify a particular depositor's compensation entitlement, and the introduction of an appropriate electronic storage and retrieval mechanism. All of this comes at a cost, particularly at a time when IT expenditure is very much off the corporate agenda unless it is absolutely essential (and mandated regulatory requirements fall firmly in the 'essential' category).
Ernst & Young, which was commissioned to undertake research into the fast payout concept, estimates the total cost to the industry to be GBP892m ($1,357 billion) over a five-year period, allowing 18 months for implementation and 42 months for maintenance. This breaks down as data cleansing (GBP196.5m/$298.4m), eligibility account flagging (GBP135.2m/$205.3m), single customer view (GBP438.8m/$666.4m), FSCS limit check (GBP21.6m/$32.8m), and storage and retrieval (GBP99.6m/$151.3m).
Datamonitor believes that this will cause an unwelcome distraction to banking executives, be they business-side or IT-side, at a time when they can least afford it. First and foremost, money must be found to pay for the mandatory system changes. With budgets under strain during 2009 (and in all likelihood into 2010 and beyond), technology projects are being funded from savings made elsewhere in virtually all cases (HSBC appears to be an exception to this rule). Secondly, resources will need to be diverted away from other technology change programs or drafted in from outside to perform the work required. Several UK banks, such as Barclays, have begun reducing IT headcount, and Datamonitor questions whether there will be adequate internal resources available to meet the implementation deadline of December 31, 2010, alongside performing tasks on existing IT activities. Consequently, this can only mean that other initiatives will suffer through delay, de-scoping or outright cancellation as a result.
The beefed-up FSCS is undoubtedly good news for depositors, but the UK's financial institutions will have a different view. However, it is sensible to have a system capable of delivering an accurate single view of a customer's deposits, and casual observers unacquainted with the finer parts of the UK banking industry may be surprised to find that such capabilities are not ubiquitous in 2009. Indeed, many IT executives are possibly wishing they had lobbied harder for the implementation of single customer view during calmer times. However, in Datamonitor's opinion this was not the type of project that sufficiently excited CEOs to the point where investment budget was made available, and these initiatives slid from the agenda as quickly as they arrived.
The UK's financial institutions have until April 6, 2009 to submit their responses, but their ability to argue against the changes to the FSCS (and by extension the individual IT infrastructure), or to extend the timescales by prolonged back-and-forth debate, has been severely weakened as a result of the financial crisis (and the subsequent emergency injection of capital by the government in several instances). Datamonitor believes that this is the dawning of a new regulatory era, as the wide-reaching banking reform work begins to gather momentum. However, if additional forthcoming legislation, and the associated mandatory changes, carries a price tag similar to the one hanging from the fast payout plan, IT investment budgets will need a shot in the arm. And, quite frankly, that will be easier said than done.
Alex Kwiatkowski